Chapter 6

The finance function and

financial information

Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance

Learning topics
1 What does the finance function do?
2 The structure of the finance function
3 Managing the finance function
4 Uses and types of financial information
5 Users of financial information and their information needs
6 Limitations of financial information in meeting users’ need
7 Information processing and management
8 Information security
9 Measuring performance
10 Measuring climate change, sustainability management and
natural capital
11 Establishing financial control processes and internal controls
Summary
Further Question Practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions
 Introduction

Learning outcomes
• Specify the role of financial information prepared by finance functions in:
– supporting businesses in pursuit of their objectives, including business partnering;
– providing for accountability of management to shareholders and other stakeholders;
– reflecting business position and performance; and
– supporting users in making decisions
• Identify the main considerations in establishing and maintaining accounting and financial
reporting functions and financial control processes.
• Identify, in the context of accounting and other systems, key aspects of:
– information processing;
– information security; and
– information management
• Specify why the management of a business require performance measurements including in
relation to sustainability, natural capital and climate change.
• Identify the accountant’s role in preparing and presenting information for the management of a
business.
Specific syllabus references are: 3a, 3b, 3c, 3d, 3e
6

Syllabus links
The topic of what the finance function does and how and why it does it are also discussed in
Accounting, Assurance and Management Information at Certificate level, in Financial Accounting and
Reporting and Financial Management at Professional level, and at the Advanced level.
6

Assessment context
Questions on the finance function will be set in the assessment in either MCQ or multiple response
format. They will be either straight tests of knowledge or applications of knowledge to a scenario.
6

Chapter study guidance

Use this schedule and your study timetable to plan the dates on which you will complete your study
of this chapter.

Topic Practical Study approach Exam approach Interactive

significance questions

1–3 Role, structure and Approach Questions on the

management of the Note the four finance function could
finance function specific tasks of the easily appear in the
The role and finance function and exam.
management of the be aware of what is Questions are likely to
finance function is involved. Read the be set in a scenario
of key importance sections on business context. Knowledge-
to any business and partnering and be type questions are also
to any accountant aware of how likely, set on particular
involved with that finance can support principles or definitions.
business. other functions. Be Essential points are:
aware of the factors
that influence the • Tasks of the finance
structure of the function

200 Business, Technology and Finance ICAEW 2023

 Topic Practical Study approach Exam approach Interactive
significance questions

finance function. • Meaning of Business

Stop and think partnering

What actually • Structure of the

happens in the finance function
finance function of a
business, as
opposed to its
marketing,
production/operatio
ns and human
resources functions?
How does the
finance function fit
in, and how does it
support the other
functions and
thereby help the
business to achieve
its strategic
objectives?

4–5 Users of financial Go through these This is an important area

information and sections carefully as that may well be tested
their information they contain a lot of in your exams. Exam
needs material that could questions will tend to
The information in feature in exams. Be focus on the qualities of
this section helps aware of the users information in financial
you to understand of financial statements.
the fundamentals of information and Essential points are:
what financial what they want.
Learn the qualitative • Meaning of planning,
information aims to controlling, recording
achieve. It forms the characteristics of
financial statements. transactions,
foundations of the performance
financial reporting Stop and think measurement and
exams later on. Why do you think decision making.
the term ‘accurate’ is • Users of financial
not one of the information
fundamental
characteristics, and • Information to
what is the support decisions
difference between • Qualitative
faithful characteristics of
representation and financial statements
accuracy?

6 Limitations of Approach Knowing the limits of

financial Read through the financial information is
information section to make important and there
yourself aware of could be a question in
the limitations of your exam on this area.
financial Questions are likely to
information. test your knowledge of
the weaknesses of
Stop and think financial statements as a
As an employee, source of information.
what information

ICAEW 2023 6: The finance function and financial information 201

 Topic Practical Study approach Exam approach Interactive
significance questions

would you like to

know about the
organisation you
work for? How much
of this is financial?
What non-financial
information would
be interesting to
you?

7 Information Approach Questions could be

processing and Start by learning the knowledge based or be
management meaning of data scenario based,
Data processing processing and the requiring you to apply
involves taking CATIVA principles. knowledge of the
unprocessed data Then read the rest of terminology, particularly
and converting it the section noting the different types of
into useful the different types of system.
management system. Essential points are:
information. Stop and think • Information
Accountants have a processing: CATIVA
key role in helping Think of examples of
businesses develop data. What • Cloud accounting,
systems that will processes are TPS and MIS
provide them with required to convert • Information
the information they this data into useful management
need. information? systems
• Distributed ledger
technology and
digital assets

8 Information security Approach Information security is a

Information security Read through the crucial aspect of risk
covers threats to section ensuring you management for most
information from all are aware of the businesses. There could
sources, not just different threats to well be questions on this
cyber threats (which security of area in your exam. You
are covered in the information. Learn need to be aware of the
chapter the qualities of risks to information and
Developments in secure information the different types of
technology) using the ACIANA controls that are used to
acronym. Ensure mitigate these risks.
you are familiar with Essential points are
the different types of • Information security:
controls over ACIANA
information.
• Different types of
Stop and think control
What controls exist
over the data that
you input into the
systems you use at
your workplace to

202 Business, Technology and Finance ICAEW 2023

 Topic Practical Study approach Exam approach Interactive
significance questions

ensure the data you

enter is accurate?

9 Measuring Approach Questions in this area IQ1: Economy,

performance This is an important tend to focus on the efficiency and
Measuring section, so spend meaning of the effectiveness
performance is one time working terminology of helps to
of the key roles of though this, performance understand the
the accountant. It is understanding the measurement. difference
also one of the most different areas that Essential points are between these
challenging, as performance three terms.
• Meaning of “three
identifying measurement Es” (economy
appropriate metrics focuses on. efficiency and
is not always Stop and think effectiveness)
straightforward.
Think of a business • Nature of key
that you are familiar performance
with. What are its indicators
critical success • Purpose of the
factors? What KPIs balanced scorecard
would you use to and the four
measure its perspectives.
performance?

10 Measuring climate Approach Green issues are a hot

change, Read through the topic in finance so we
sustainability section and can expect questions on
management and understand why this area in the exam.
natural capital climate change and Essential points are:
There is more and sustainability are • Impact of climate
more recognition of relevant to change on
the fact that businesses. Be businesses.
businesses have a aware of the
responsibility to frameworks and • Four areas of
stop damaging the know at a higher disclosure in the
environment and to level what they TCFD.
start operating in a include, but don’t try • Be aware of the GRI
sustainable manner. to memorise all the disclosures and the
Accountants have a detailed fact that GRI covers
role in helping requirements. economic, social and
provide information Stop and think environmental
about this. reporting.
From the
perspective of a • The Climate
shareholder, are Disclosure Standard
there any benefits to Board’s framework
taking actions to • The new International
reduce carbon Sustainability
emissions? Standards Board
• The value framework

11 Establishing Approach Essential points are:

financial control Read through the • Purpose of internal
processes and section. Be aware of controls
internal controls what internal • Control activities
controls are. Learn

ICAEW 2023 6: The finance function and financial information 203

 Topic Practical Study approach Exam approach Interactive
significance questions

Many financial and the control activities

management roles listed. Be aware of
involve being able the responsibility of
to assess or give senior management
advice on internal for ensuring that an
controls. effective internal
control and risk
management
process is in place.

Once you have worked through this guidance you are ready to attempt the further question practice
included at the end of this chapter.

204 Business, Technology and Finance ICAEW 2023

 1 What does the finance function do?
Section overview

• The finance function looks after the business’s money. Its tasks are: recording transactions,
management accounting, financial reporting and treasury management.
• The finance function supports the business’s pursuit of its strategic objectives by providing
information to measure performance and support decision-making, and by ensuring the business
has sufficient funds for its activities.

In the chapter Managing a business, we saw that the main functions of a business are marketing,
operations/production, procurement, human resources, IT and finance. This reflects the model of the
business as taking three basic types of resource – materials, labour and money – to produce goods
and services which generate profit. It is a major part of the finance function’s role to look after the
business’s money.
In this chapter we provide an overview of the work of the finance function and how it supports
achievement of the business’s objectives.

1.1 The tasks of the finance function

The finance function is involved in four specific, but often interrelated, tasks.

Definitions
Recording financial transactions: Ensuring that the business has an accurate record of its revenue,
expenses, assets, liabilities and capital.
Management accounting: Providing information to help managers and other internal users in their
decision-making, performance measurement, planning and control activities.
Financial reporting: Providing information about a business to external users that is useful to them in
making decisions and for assessing the stewardship of the business’s management.
Treasury management: Managing the funds of a business, namely cash and other working capital
items, plus long-term investments, short-term and long-term debt, and equity finance.

The separate parts of the finance function carry out the following tasks in fully computerised
accounting systems:
• Recording financial transactions:
– Recording financial transactions (payroll, credit sales, credit purchases, and cash receipts and
payments) in the accounting records
– Entering summaries of transactions in the permanent records (nominal, receivables and
payables ledgers) from the accounting records
– Ensuring that resources are properly controlled (stewardship)
– Cloud accounting, machine learning, automation and distributed ledger technology will
increasingly affect how financial transactions are recorded, who they are recorded by, and who
can access and rely on them (see the chapter Introduction to financial information)
• Management accounting:
– Preparing financial information for internal users (internal reporting for planning and control to
those charged with management and with governance)
– Identifying or determining the unit cost of the goods and/or services produced by the
business, including classification into fixed and variable costs, or direct and indirect costs (cost
accounting)
– Planning ahead by preparing forecasts and budgets
– Helping management decision-making (cost-volume-profit (CVP) analysis, including breakeven
and limiting factor analysis)

ICAEW 2023 6: The finance function and financial information 205

 – Preparing performance measures and identifying reasons for good and bad performance,
including variance analysis
– Analysing capital investment decisions
– Determining sales and transfer prices
• Financial reporting:
– Preparing financial information including financial statements for external users (external
reporting) to enhance good corporate governance (see the chapters Governance and ethics
and Corporate governance)
– Tax reporting (eg, to HM Revenue and Customs (HMRC) in the UK)
– Regulatory reporting
• Treasury management:
– Preparing and monitoring cash budgets
– Managing surpluses and deficits in cash balances
– Managing working capital from day to day so as to optimise cash flow, including inventory,
receivables and payables management
– Analysing short-term and long-term financing decisions
– Managing investments
– Managing foreign exchange
– Managing financial risk
– Raising long-term finance (debt and equity) (see the chapter Business finance)

1.2 Business partnering – supporting the pursuit of business objectives

Definition
Business partnering: Involves the finance function working alongside other business functions rather
than being a separate function on their own. Instead of only reporting on organisational
performance, the role of the finance function becomes one of providing advice and support to the
other areas of the business, to help them maximise their performance.

ICAEW’s guide Finance business partnering: a guide (2018) provides an explanation of business
partnering. In business partnering, finance functions are embedded into the various organisational
functions. This often means that they work alongside members of, for example, the marketing,
operations, procurement and human resources functions. However, this is not always the case and
business partnering may be achieved remotely, or by the finance function forming close
relationships with the other business functions. Whatever practical form business partnering takes,
finance functions are often used as sources of financial expertise that provide insights into the
performance of the business functions that they support. However, this role can expand to other
aspects such as:
• involvement in strategy formulation, implementation and communication;
• involvement in commercial decision making and negotiations;
• leading on business analysis; and
• being a sounding board, trusted adviser, critical friend and facilitator of productive business
discussions
Such roles mean that members of the finance team are in a position to add as much value to the
organisation as they can. Other examples of support and insight that the finance function provides to
specific business areas include:
• marketing – insights into the drivers of revenue, analysis of sales volumes, and advice on pricing
(such as price elasticity of demand)
• operations/production – variance analysis to identify reasons behind increases or decreases in
cost per unit, decision support for new products or closing down operations
• IT – monitoring of KPIs for IT performance such as system downtime and age of IT equipment to
identify need for investment in new equipment

206 Business, Technology and Finance ICAEW 2023

 • HR – analysis of payroll costs and productivity of employees
• procurement – monitoring of supplier performance against service level agreements (such as
whether delivery schedules were met and in regards to quality of materials delivered)
• research and development – project appraisal to recommend new areas to research and develop
new products in, monitoring and controlling costs against budget
As well as the advice and support provided through business partnering, the finance function
supports the business in achieving its objectives in other ways, for example by:
• undertaking transaction processing and ensuring there are sufficient financial control processes
in the system;
• providing information to support decisions and measure performance (financial reporting and
management accounting); and
• ensuring there is finance and cash available for the business’s activities (treasury management)

1.3 Factors relating to effective business partnering

1.3.1 Dilemmas
There is a risk that a finance business partner may get too close to the business function managers.
This may lead to a compromise of objectivity and independence. This could potentially lead to:
• subverting governance processes through misreporting; and
• sidestepping controls with wide-reaching consequences
A second dilemma is that insufficient time is allocated to business partnering because:
• people who lack the necessary knowledge, skills and attitudes to perform business partnering
may divert their attention to tasks they feel more comfortable with, instead of prioritising business
partnering work; and
• resistance by operational managers can make business partnering roles stressful making it
preferable to spend time elsewhere

2 The structure of the finance function

Section overview

• Many businesses centralise some if not all of the finance function’s tasks.
• All aspects of the finance function’s tasks depend on the efficient and effective initial recording of
financial transactions.

How the finance function is organised depends on the size of the business and its overall
organisational structure. In many businesses, even very large ones, some if not all of the finance
function’s tasks are centralised. This is particularly helpful with respect to overall management of cash
and to external reporting, but it is not so helpful with respect to making sure that local operational
managers get all the information and support they need (internal reporting). Total centralisation is
even more problematic when the business operates in global markets, where exchange rates and
time differences make the structure unwieldy.
A typical finance function which performs all the tasks set out above would be structured as in Figure
6.1. Note that the data and information provided by those responsible for recording financial
transactions feed into each of the other three sections.
Against some items we have noted where you will encounter detailed coverage elsewhere in the
ICAEW syllabus. We refer to:
• ACC Accounting; Financial Accounting and Reporting
• MI Management Information
• FM Financial Management
• TAX Principles of Taxation; Tax Compliance

ICAEW 2023 6: The finance function and financial information 207

 Finance function

Recording financial transactions (ACC):

• Computerised accounts
• Ledgers

Management accounting Treasury management Financial reporting:

(MI): (FM/MI): • Financial statements (ACC);
• Cost accounting • Cash budgets see also Chapter 6
• Budgeting • Long-term finance • Tax (TAX)
• Management decisions • Provision of information to
decision-making • Managing financial risk external regulators (ACC);
• Performance • Raising investment see also Chapter 6
measurement finance
• Capital budgeting and • Management of cash,
decision making including foreign
• Pricing exchange
• Management of working
capital

Internal reporting External reporting

Figure 6.1: The finance function

3 Managing the finance function

Section overview

• As with any other of the business’s functions, the finance function needs to be effectively
organised and led, with its performance properly planned and controlled.

The optimum structure for any particular business’s finance function will be affected by all the factors
considered in the chapter Organisational and business structures, in particular:
• its business structure (sole trader, partnership, company)
• its organisational structure, size and geographical dispersion, including the degree of
centralisation required
• its markets
• its technology (such as the use of cloud accounting and cognitive technologies)
• its history and ownership
• its culture (human relations, open systems, internal process or rational goal)
Within the finance function its managers are responsible for ensuring that the function is properly
managed and achieves its objectives. The way in which they do this is to perform the tasks of
management that we saw in the chapter Managing a business.

3.1 Planning and control

The overall direction of the finance function’s work needs to be planned and controlled, including:

208 Business, Technology and Finance ICAEW 2023

 • forecasting what is needed (the processing that needs to be done, and the reports and finance
that need to be available)
• evaluating available resources, such as qualified staff and robust information systems
• developing objectives, plans and targets
• implementing the plan and measuring performance
• using feedback from measuring performance to make necessary amendments to the plan

3.2 Organising and leading

Time and effort in the finance function need to be organised so that its objectives and targets are
met, including:
• defining what processes, technology and people are required
• allocating and co-ordinating work
• generating effort and commitment in finance staff

Professional skills focus: Structuring problems and solutions

Questions may ask you what is an appropriate structure for a finance function. You may be required
to demonstrate understanding of the business, its strategy, industry and wider context.

4 Uses and types of financial information

Section overview

• Financial information comprises information about a business’s activities expressed in monetary

terms.
• Information on a business’s finances is used for planning, controlling, recording transactions,
measuring performance and making decisions.
• Planning, operational, tactical and strategic information are all required.

Definition
Financial information: A broad definition is that financial information is information about an entity’s
activities expressed in monetary terms. A narrower definition, contained in the IFRS® Conceptual
Framework, is that financial information is information contained in an entity’s financial report. This
includes information on the entity’s income, expenses, assets, liabilities and equity.

4.1 Why do businesses and managers need financial information?

Businesses and managers require financial information for:
• planning;
• controlling;
• recording transactions; and
• performance measurement

4.1.1 Planning
Once a decision has been made, say on what competitive strategy to follow, it is necessary to plan
how to implement the steps necessary to make it effective. Planning requires a knowledge of, among
other things, available resources, possible timescales for implementation and the likely outcome
under alternative scenarios.

ICAEW 2023 6: The finance function and financial information 209

4.1.2 Controlling
Once a plan is implemented, its actual performance must be controlled. Information is required to
assess whether implementation is proceeding as planned or whether there is some unexpected
deviation from plan. It may consequently be necessary to take some form of corrective action.

4.1.3 Recording transactions

Information about each transaction or event is required for a number of reasons.
• Documentation of transactions can be used as evidence in a case of dispute
• There may be a legal requirement to record transactions, for example for accounting and audit
purposes
• Detailed information on production costs can be built up, allowing a better assessment of
profitability

4.1.4 Performance measurement

Just as individual operations need to be controlled, so overall performance must be measured in
order to enable comparisons of the actual outcome with the plan. This may involve collecting
information on, for example, costs, revenues, volumes, timescale, profitability and long-term
sustainability.

4.1.5 Decision making

Information is required as a basis on which to make informed decisions. This completes the full circle
of the business management process.

4.2 Type of information

Information can be classified according to the use to which it is put. The same type of information
will not be provided to a front-line manager of a team of machine operatives as to the board of
directors. This is because the front-line manager needs to know how many operatives can be
employed on one shift, for instance, while the board of directors want to know whether enough
skilled operatives can be available in the medium-term to resource increased production of a
successful new product.
Information can thus be classified as follows.
• Planning information helps people involved in the planning process
• Operational information helps people carry out their day-to-day activities, eg, how many
operatives are needed on one shift
• Tactical information helps people deal with short-term issues and opportunities, eg, monthly
variance reports for the factory
• Strategic information supports major long-term decision making, eg, can resources be made
available to expand production?

5 Users of financial information and their information

needs
Section overview

• Different stakeholders use financial information for different purposes, and require different
amounts and types of information for these purposes.
• Financial information is useful when it supports decision-making by users, and allows them to
hold managers to account.
• Financial information should have the fundamental qualitative characteristics of relevance and
faithful representation and the enhancing qualitative characteristics of comparability, verifiability,
timeliness and understandability.

210 Business, Technology and Finance ICAEW 2023

5.1 What is financial information used for?
The Conceptual Framework for Financial Reporting (also known as the IFRS Framework), issued by
the International Accounting Standards Board (the Board) sets out the objectives of financial
information. It is focused on published financial statements in particular, rather than financial
information in general, but it usefully points out that nearly all users use financial information to make
decisions, such as those to:
• decide when to buy, hold or sell an equity investment or a debt instrument;
• decide whether to provide or settle loans or other forms of credit; and
• decide how to vote or otherwise influence management decisions

5.2 Who uses financial information?

The following are the primary users of financial information and their specific information needs.

Primary users Need financial information to:

Present and potential investors ( • (Make decisions about buying, selling or holding equity,
shareholders) therefore need information on:
– risk and return of investment; and
– ability of company to pay dividends
• Perform financial due diligence prior to the acquisition of
a business or when making a significant investment. Due
diligence is an investigation into the organisation’s assets,
liabilities, income, expenses and capital via the financial
statements and other information to help make a decision
about its commercial value.

Lenders and other payables • Make decisions about buying, selling or holding debt
instruments and providing or settling loans or other forms
of credit
• Assess whether loans will be repaid, and related interest
will be paid, when due

Other users and their financial information needs are as follows:

Other users Need financial information to:

Employees • assess their employer’s stability and profitability

• assess their employer’s ability to provide remuneration,
employment opportunities and retirement and other benefits

Customers • assess whether business will continue in existence – important

where customers have a long-term involvement with, or are
dependent on, the business, eg, where they are supply chain
partners

Suppliers and other • assess the likelihood of being paid when due
business partners

Governments and its • assess allocation of resources and, therefore, activities of

agencies, including businesses
prudential and market • help in regulating activities
regulators
• assess taxation income
• provide a basis for national statistics
• help direct policy on, for instance, health and safety and equal
opportunities issues

ICAEW 2023 6: The finance function and financial information 211

 Other users Need financial information to:

The public and community • assess trends and recent developments in the business’s
representatives prosperity and its activities – important where the business
makes a substantial contribution to a local economy, eg, by
providing employment and using local suppliers

5.3 When is financial information useful?

Financial information is useful to users when it:
• helps them to make decisions; and
• shows the results of management’s stewardship of the resources entrusted to them
For financial information to meet these two objectives it must be prepared on the basis of two
underlying assumptions:
• The accrual basis of accounting: the effects of transactions and other events are recognised
when they occur (not as they are realised in cash), and they are recorded and reported in the
financial statements of the periods to which they relate
• The business is a going concern and will continue in operation for the foreseeable future

5.4 Information for making decisions and making managers accountable

When users make decisions, they need financial information to evaluate:
• The ability of a business to generate cash so as to:
– pay employees and suppliers;
– meet interest payments;
– repay loans; and
– pay dividends
• The timing and certainty of cash flows
Primary users therefore need information about the entity’s ‘economic phenomena’:
• the economic resources of the entity
• claims against the entity
• the effects of transactions and other events and conditions that change those resources and
claims
Information on these phenomena also helps the user to evaluate how efficiently and effectively the
entity’s management and governing board have discharged their stewardship responsibilities to use
the entity’s resources.
In order to evaluate whether the business can generate sufficient cash on time the user needs
information on the business’s:
• financial position (its statement of financial position);
• financial performance (its statement of profit or loss); and
• changes in financial position (its statement of cash flows)
These are contained in the business’s financial statements

5.4.1 Information on financial position

Factors affecting the Information on this factor is useful for predicting

business’s financial position

The economic resources it The business’s ability to generate cash in the future
controls

Its liabilities What the organisation owes to third parties, for example debts
and other claims against the entity

Its financial structure • future financing needs

212 Business, Technology and Finance ICAEW 2023

 Factors affecting the Information on this factor is useful for predicting
business’s financial position

• how future profits and cash flows will be distributed among

stakeholders
• the business’s likely success in raising new equity and
borrowing

Its liquidity Whether cash will be available in the near future after taking
account of current financial commitments

Its solvency The availability of cash in the longer term to meet financial
commitments as they fall due

Its adaptability Its capacity to adapt to changes in the environment in which it

operates

5.4.2 Information on financial performance

Information on the business’s profitability, especially variability in profits over time, helps the user to
predict or assess:
• potential changes in the economic resources the business is likely to control in the future;
• the business’s capacity to generate cash flows from its existing resource base; and
• how effectively the business might employ additional resources

5.4.3 Information on changes in financial position

Information on the business’s past cash flows helps the user to predict or assess its investing,
financing and operating activities during the reporting period. This helps the user to assess:
• how able the business is at generating cash; and
• how well the business uses cash that it has generated

5.5 Qualitative characteristics of financial statements

The IFRS Framework states that if financial information is to be useful, it must be relevant and
faithfully represent what it purports to represent. The Framework also states that the usefulness of
financial information is enhanced if it is comparable, verifiable, timely and understandable.

Definitions
Fundamental qualitative characteristics: The attributes that are fundamental in making information
provided in financial statements useful to users (IFRS Framework):
• Relevance
• Faithful representation
Enhancing qualitative characteristics: The attributes that enhance the fundamental usefulness of
information provided in financial statements to users (IFRS Framework):
• Understandability
• Comparability
• Verifiability
• Timeliness

5.5.1 Fundamental qualitative characteristic: relevance

The IFRS Framework states that financial information is relevant if it is capable of making a difference
in the decisions made by users, by means of its predictive value, confirmatory value or both.
• It has predictive value if it can be used as an input to processes employed by users to predict
future outcomes. Financial information need not be a prediction or forecast to have predictive
value, as it can be in some other form and be employed by users in making their own predictions.

ICAEW 2023 6: The finance function and financial information 213

 • It has confirmatory value if it provides feedback about (confirms or changes) previous evaluations.
In other words, information is relevant to users when it influences their decisions because they can
thereby:
• evaluate past, present or future events; and
• correct or confirm past evaluations
Relevance is affected by:
• the nature of certain items: Some pieces of information are highly relevant whatever their
monetary value, such as the acquisition of a new business with significantly increased risks.
• the materiality of certain items: Materiality is an entity-specific aspect of relevance based on the
nature or magnitude, or both, of the items to which the information relates in the context of an
individual entity’s financial report. In other words, a piece of information is material if omitting it or
misstating it could influence decisions that users make on the basis of financial information about
a specific reporting entity.
• the IFRS Framework confirms that measurement uncertainty does not prevent information from
being useful. However, if measurement uncertainty is very high, then it may be more useful to use
slightly less relevant information that has a lower level of measurement uncertainty.

5.5.2 Fundamental qualitative characteristic: faithful representation

To be useful, financial information must faithfully represent the entity’s economic phenomena (as
defined in the IFRS Framework) in words and numbers. To be a faithful representation it must
therefore be:
• complete, including all necessary descriptions and explanations;
• neutral (ie, without bias in the selection or presentation of information); or
• free from error (with no errors or omissions in the description of the phenomena, and with no
errors in the process used to produce the reported information)
In regard to neutrality, the Framework states that neutrality is supported by the exercise of prudence.
This is the exercise of caution when making judgements under conditions of uncertainty. Prudence
does not allow the overstatement or understatement of assets, liabilities, income or expenses.

5.5.3 Enhancing qualitative characteristic: understandability

Information should be clear and concise if it is to be readily understandable. Users are assumed to
have a reasonable knowledge of economic and business affairs and to be willing to be reasonably
diligent in the way they study financial information. Relevant information should not be excluded
from financial statements merely because it is hard to understand.

5.5.4 Enhancing qualitative characteristic: comparability

Measurement and display of the financial effect of like transactions and other events must be carried
out in a consistent way:
• throughout the business
• over time
• across different businesses

5.5.5 Enhancing qualitative characteristic: verifiability

The IFRS Framework states that verifiability means different knowledgeable and independent
observers could reach consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation using either direct or indirect methods. Information about the
future cannot be verified as such, but a statement of underlying assumptions about any such
information will help verifiability.

5.5.6 Enhancing qualitative characteristic: timeliness

The IFRS Framework states that timeliness means having information available to decision-makers in
time to be capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end of a reporting
period because, for example, some users may need to identify and assess trends.

214 Business, Technology and Finance ICAEW 2023

5.6 The cost constraint on useful financial reporting
The IFRS Framework acknowledges that there is a cost constraint on the financial information that can
be provided. The benefits derived from information for all users should justify the cost of providing it.

6 Limitations of financial information in meeting users’

need
Section overview

Financial information may be of limited usefulness because its presentation is standardised and
aggregated, it is backward looking and it omits non-financial information.

As far as they go, general purpose financial statements are of most use to investors, lenders and
other payables. Their use for other interested parties, especially regulators, may be more limited. In
fact, the usefulness of financial information is limited in general by a number of factors.

6.1 Standardised and aggregated representation

Financial information, particularly financial statements, is usually highly standardised in terms of
their overall format and presentation although businesses are very diverse in their nature. This may
limit the usefulness of the information.
Financial statements are highly aggregated in that information on a great many transactions and
balances is combined into a few figures in the financial statements, which can often make it difficult
for the reader to evaluate the components of the business.

6.2 Backward-looking
Financial statements cover a period that has already ended; they are inherently historical and
backward-looking, whereas most users of financial information base their decisions on expectations
about the future. Financial statements contribute towards this by helping to identify trends and by
confirming the accuracy of previous expectations, but they cannot realistically provide the complete
information set required for all decisions by all users.

6.3 Omission of non-financial information

By their nature, financial statements contain information that is financial, not non-financial such as:
• narrative description of major operations
• discussion of business risks and opportunities
• narrative analysis of the business’s performance and prospects
• management policies and how the business is governed and controlled
Instead, these are normally covered in the strategic report and the Directors’ Report, published
alongside the financial statements.

6.4 Other sources of information

There are other sources of information available to at least some users of the basic financial
statements.
• Information on the internet and social media, Press reports and other media coverage are
available to all.
• In owner-managed businesses, the owners have access to internal management information
because they are the management. This information is, potentially, available on a continuous real-
time basis and will include:
– future plans for the business;
– budgets or forecasts; and
– management accounts, including, for example, divisional analysis

ICAEW 2023 6: The finance function and financial information 215

 • Banks will often gain additional access to business information under the terms of loan
agreements.
• Potential investors, if they are planning to take a major stake or even a controlling interest, will
negotiate additional access to information.
• Suppliers may be able to obtain reports on the business’s credit standing via credit reference
agencies such as Experian. These are also used by lenders.
• Some information, such as brochures and publicity material (eg, press releases), is available to all.
• Brokers’ reports on major companies are available fairly widely.

7 Information processing and management

Section overview

• In the information processing system data is input, processed and then output as information.
• Information processing needs to be complete, accurate, timely, inalterable, verifiable and
assessable (CATIVA).
• The transaction processing system (TPS) performs, records and processes routine information for
marketing, production/operations, finance and HR functions.
• The management information system (MIS) processes data into information that supports and
facilitates decision-making by managers.

Definition
Information processing: Data, once collected, is converted into information for communicating
more widely within the business.

7.1 CATIVA criteria

To be effective, information processing should meet the following CATIVA criteria:

Completeness Everything that needs to be processed should be processed.

Accuracy Processing should be done so that the data remains true to its sources, and the
information produced contains no errors.

Timeliness Processing should occur in line with data availability and information needs,
which means real time (instantaneously) in many cases.

Inalterability The process should be open to neither unauthorised intervention while in

action nor alteration once completed (this aids accuracy and security).

Verifiability The sources of the data and the trail from data through processing to
information should be capable of being followed through.

Assessability The effectiveness of the processing should be open to scrutiny so that its
quality can be judged.

7.1.1 Information systems

Just as materials and labour are processed into outputs by the business’s production or operations
system, so are data processed into information by the business’s information systems.

Definitions
System: A set of interacting components that operate together to accomplish a purpose.
Business system: A collection of people, machines and methods organised to accomplish a set of
specific functions.

216 Business, Technology and Finance ICAEW 2023

 Information systems (IS): All systems and procedures involved in the collection, storage, production
and distribution of information.
Information technology (IT): The equipment used to capture, store, transmit or present information.
IT provides a large part of the information systems infrastructure.
Information management: The approach that a business takes towards the management of its
information including planning IS/IT developments, the organisational environment of IS, control and
technology.

A system has three component parts: inputs, processes and outputs. Other key characteristics of a
system are the environment and the system boundary – as shown below:
System boundary

Environment Environment

Input (data) Output (information)

Processing

• The data input may be output from other systems; for example, the output from a transactions
processing system forms the input for a management information system (as we shall see).
• Processing transforms input data into output information. There is not necessarily a clear
relationship between the number of inputs to a process and the number of outputs.
• Output information is the result of the processing.
• A system boundary separates the information system from its environment. For example, the
marketing information system and the accounting information system are generally separate, but
there may be an interface between the two systems to allow the exchange of resources. There
may also be interfaces between internal and external information systems, for instance between a
processing system and the sales system of its major suppliers.
• Anything which is outside the system boundary belongs to the system’s environment and not to
the system itself. A system accepts inputs from the environment and provides outputs into the
environment. The parts of the environment from which the system receives inputs may not be the
same as those to which it delivers outputs. The environment exerts a considerable influence on
the behaviour of a system; but the system can do little to control the behaviour of the
environment.
In relation to financial information, the two information processing systems in which we are most
interested are:
• the transaction processing system; and
• the management information system

7.2 The transaction processing systems

Definition
Transaction processing systems (TPS): A system which performs, records and processes routine
transactions.

A TPS is used for routine tasks in which data items or transactions must be processed so that
operations can continue. A TPS supports most business functions in most types of business.

ICAEW 2023 6: The finance function and financial information 217

 Transaction processing systems

Sales/marketing Manufacturing/ Finance/ Human resources

system production system accounting system system

Major • Sales • Scheduling • Budgeting • Personnel

functions management • Purchasing • Nominal ledger records
of system • Marketing • Benefits
• Shipping/ • Invoicing
research receiving • Salaries
• Management
• Promotion • Engineering accounting • Labour relations
pricing
• Operations • Training
• New products

Major • Sales order • Materials resource • Nominal ledger • Payroll

parts of system planning • Accounts • Employee
systems • Marketing • Purchase order receivable records
research control /payable • Employee
system • Engineering • Budgeting benefits
• Pricing • Quality control • Treasury • Career path
system management systems

7.3 The management information system (MIS)

Definition
Management information system: Converts data from mainly internal sources into information (eg,
summary reports, exception reports). This information enables managers to make timely and
effective decisions for planning, directing and controlling the activities for which they are
responsible.

An MIS provides regular reports and (usually) on-line access to the business’s current and historical
performance. The MIS transforms data from underlying TPS into summarised files that are used as the
basis for management reports. It:
• supports structured decisions at operational and management control levels
• is designed to report on existing operations
• has little analytical capability
• is relatively inflexible
• has an internal focus

8 Information security
Section overview

• Information is a valuable commodity and therefore needs to be kept secure.

• Risks to data include human error, technical error, natural disasters, deliberate damage and
industrial action.
• Information security involves prevention, detection and deterrence of risks to data, plus recovery
and correction procedures and threat avoidance.
• A secure information system is only available when needed and maintains confidentiality. The
information is authentic and has integrity. Changes must be authorised. It is designed so that
users will not have to reject the information on the basis that it is faulty in any way (ACIANA – see
later).
• Information security is ensured by means of physical access, security and integrity controls.

218 Business, Technology and Finance ICAEW 2023

8.1 Why is information security important?
If you own something that you value – you look after it. Information is valuable and it deserves
similar care.

Definition
Security (in information management): The protection of data from accidental or deliberate threats
which might cause unauthorised modification, disclosure or destruction of data, and the protection
of the information system from the degradation or non-availability of services.

The risks to data are as follows:

• human error
• entering incorrect transactions
• failing to correct errors
• processing the wrong files
• technical error such as malfunctioning hardware or software
• natural disasters such as fire, flooding, explosion, impact, lightning
• deliberate actions such as fraud
• commercial espionage
• malicious damage
• industrial action
• cyber risks, such as data corruption, hacking or being held to ransom
Many of these are the physical and cyber risks that we saw in the chapter Introduction to risk
management; risk management and controls are key issues in ensuring the security of information
systems.

8.2 Ensuring the security of information

Aspects of security include the following:
• Prevention. It is in practice impossible to prevent all threats cost-effectively, but prevention is
better than cure.
• Detection. Detection techniques are often combined with prevention techniques: a log can be
maintained of unauthorised attempts to gain access to a computer system.
• Deterrence. As an example, computer misuse by personnel can be made grounds for disciplinary
action.
• Recovery procedures. If the threat occurs, its consequences can be contained (for example,
checkpoint programs).
• Correction procedures. These ensure the vulnerability is dealt with (for example, by instituting
stricter controls).
• Threat avoidance

8.3 Qualities of a secure information system: ACIANA

Availability Information can always be accessed by authorised people.

Confidentiality Information cannot be accessed by anyone who does not have the right
to see it.

Integrity Data is the same as in its sources and has not been accidentally or
deliberately reduced, altered, destroyed or disclosed.

Authenticity Data and information are taken from bona fide sources.

ICAEW 2023 6: The finance function and financial information 219

 Non-repudiation Information is not open to being rejected by its intended users on the
grounds of faults in the system.

Authorisation Changes in the system can only be made by persons who are
accountable for them.

8.3.1 Physical access controls

• Personnel, including receptionists and, outside working hours, security guards can help control
human access
• Door locks can be used where frequency of use is low. (This is not practicable if the door is in
frequent use.)
• Locks can be combined with:
– a keypad system, requiring a code to be entered; and
– a card entry system, requiring a card to be ‘swiped’
• Intruder alarms
• Laptops, tablets, smartphones and other devices with access to the system should be kept secure
• Staff should be allocated an individual personal identification number, or PIN, which identifies
him or her to the building

8.3.2 Security controls in the system

These help to prevent:
• human error:
– entering incorrect transactions
– failing to correct errors
– processing the wrong files
• technical error such as malfunctioning hardware or software
• deliberate actions such as fraud
• commercial espionage
• malicious damage

8.3.3 Integrity controls in the system

Data will maintain its integrity if it is complete and not corrupted.
• The original input of the data must be controlled in such a way as to ensure that the results are
complete and correct. Input controls should ensure the accuracy, completeness and validity of
input.
– data verification involves ensuring data entered matches source documents
– Data validation involves ensuring that data entered is not incomplete or unreasonable. Various
checks include:
◦ check digits. A digit calculated by the program and added to the code being checked to
validate it
◦ control totals. For example, a batch total totalling the entries in the batch
◦ hash totals. A system generated total used to check processing has been performed as
intended
◦ range checks. Used to check the value entered against a sensible range, eg, ledger account
number must be between 5,000 and 9,999
◦ limit checks. Similar to a range check, but usually based on an upper limit, eg, must be less
than 999,999.99
• Any processing and storage of data must maintain the completeness and correctness of the data
captured. Processing controls should ensure the accuracy and completeness of processing.
Programs should be subject to development controls and to rigorous testing. Periodic running of
test data is also recommended.

220 Business, Technology and Finance ICAEW 2023

 • Reports or other output should be set up so that they, too, are complete and correct. Output
controls could include:
– investigation and follow-up of error reports and exception reports produced by the system
– batch controls to ensure all items are processed and returned
– controls over distribution/copying of output
– labelling of storage media
The system should have a back-up and archive strategy, including:
• regular back-up of data (at least daily);
• archive plans; and
• a disaster recovery plan including off-site storage
Users of the system should be given a password. While unauthorised persons may circumvent
physical access controls, a logical access system can use passwords to prevent access to data and
program files, by measures such as:
• identification of the user;
• authentication of user identity; and
• checks on user authority
Personnel selection is important. Key people with access to the system should be carefully recruited.
There should also be:
• job rotation and enforced vacations;
• systems logs; and
• review and supervision
For other staff, segregation of duties is a core security requirement. This involves division of
responsibilities into separate roles:
• data capture and data entry
• computer operations
• systems analysis and programming

Professional skills focus: Concluding, recommending and communicating

You may be required to identify a control to reduce a particular risk. Ensure you understand which
risks each control above is designed to reduce.

9 Measuring performance
Section overview

• Performance measures may be qualitative, or they may be financial or non-financial quantitative

measures.
• They are calculated to assess the business’s profitability, activity and productivity, in particular:
– resource use: effectiveness, economy and efficiency;
– critical success factors (CSFs) using key performance indicators (KPIs); and
– sustainability: social, environmental and economic issues
• Performance measures should be focused on the user and what they need them for.
• Comparability (with budgets, trends, other parts of the business and other businesses), often
using benchmarking, is a key issue for performance measurement.
• Problems with performance measures are due to information and comparison problems.
• The balanced scorecard combines measures relating to: financial performance, customers,
innovation and learning, and business processes.

ICAEW 2023 6: The finance function and financial information 221

 • Organisations are working on how best to measure the natural capital they use so that the use of
natural capital is at the core of all business decisions.

The planning and control system model (Figure 1.2 in the chapter Introduction to business) showed
us that actual performance follows on from setting operational objectives and developing plans and
standards; what is achieved is then compared with the plan so that control action may be taken to
deal with any deviations. Provided this planning and control model is followed effectively the
organisation’s objective should be achieved.
It is on measuring performance and making the comparison that a great deal of the work of the
accountant is focused. Each business will have different ways of measuring its performance and will
place greater emphasis on certain factors over others.

9.1 Types of performance measure

• Qualitative measures are subjective and judgemental, and are not expressed in numerical terms
(we do not consider these further here).
• Quantitative measures are objective and based on data which must be reliable; they are
expressed in numerical terms and can be separated into:
– financial measures (based on data as to sales, profit etc); and
– non-financial measures (based on data as to number of items produced or phone calls
answered etc)
Both types of measure can be incorporated into a business-wide set or balanced scorecard of
measures for use by senior managers and directors, as we shall see later in this chapter.
In general, there are three points of reference for measurement in a business.
• Profitability
Profit has two components: cost and revenue. All parts of a business and all activities within it
incur costs, and so their success needs to be judged in relation to cost (these will be called cost
centres). Only some parts of a business receive revenue, and their success should be judged in
terms of both cost and revenue (as profit centres).
• Activity
All parts of a business are also engaged in activities (activities cause costs). Activity measures
could include the following.
• number of orders received from customers, a measure of the effectiveness of marketing
• number of machine breakdowns attended to by the repairs and maintenance function
Each of these items could be measured in terms of physical numbers, monetary value, or time spent.
• Productivity
This is the quantity of the service or product produced in relation to the resources put in, for
example so many items processed per hour or per employee. It defines how efficiently resources
are being used.
The dividing line between productivity and activity is thin, because every activity could be said to
have some ‘product’ (if not it can be measured in terms of lost units of product or service).

9.2 Measuring profitability

Profit consists of revenue less the business’s costs. It is measured initially in £s in absolute terms, for
instance ‘net profit of £18,000’. More meaningfully it is then measured in relative terms, usually
relative to revenue (‘net margin of 18% on revenue of £100,000’) and capital (‘return is 1.8% on
capital of £1 million’).
If the desired level of profit is not achieved, the owner will close the business and try something else.
Exactly the same idea applies to large companies financed by shares: if shareholders do not receive
what they perceive to be an adequate return on their investment they will take their money
elsewhere.
This concept of profit is important to the business’s managers. If profit is to be a business’s primary
objective, it must be specified in quantified terms, that is a specific target rate of profit must be set.
Effectively, this rate can only be determined by examining the opportunity cost of investing in the

222 Business, Technology and Finance ICAEW 2023

 business: this is given by the rate of profit available on alternative investments with similar
characteristics, particularly risk. This is then the minimum rate of return acceptable to the
shareholders.

9.3 Measuring resource use: effectiveness, economy and efficiency

A business uses a great many different types of resource in going about its operations so as to
achieve its objectives. As well as materials, labour and finance (as we saw in Figure 1.1 in the chapter
Introduction to business), there are also:
• physical assets (buildings, machinery etc)
• competences (what the business is good at doing)
• intangible assets (eg, licenses and development costs, that would be recognised in financial
statements; customer goodwill, corporate image, brands, digital assets, that would not be
recognised in financial statements)
• the way in which the business is structured
• the knowledge that is available to the business
Efficient use of resources is concerned with the economy with which resources are used, and the
effectiveness of their use in achieving the objectives of the business.
• Economy the is reduction or containment of cost; this can be measured against targets.
• Effectiveness is the measure of achievement and is assessed by reference to objectives, such as
whether planning and control mechanisms work, and whether the target profit has been attained.
• Efficiency means being effective at minimum cost or controlling costs without losing operational
effectiveness. Efficiency is therefore a combination of effectiveness and economy.
The accountant needs to supply managers with measurements of the business’s performance so that
an assessment can be made as to whether objectives of strategic business units (SBUs), or indeed the
whole business are being met, and if so how:
• productively: what is output relative to what is input?
• effectively: how far are targets and objectives achieved?
• efficiently: what is the gain that the business has achieved?
Many businesses emphasise the importance of developing resources, capabilities and competencies
that will improve efficiency in the future, and so develop and measure critical success factors and key
performance indicators to show whether performance has been good in key areas.

Interactive question 1: Economy, efficiency and effectiveness

An electronics company makes one product. The production process is labour intensive. The market
for this product is highly competitive so quality is extremely important.
Requirement
Suggest one measure each for economy, efficiency and effectiveness for the company.

See Answer at the end of this chapter.

9.4 Measuring critical success factors (CSFs)

CSFs (which we saw in the chapter Introduction to risk management) differ from one business to
another; in some areas of business keeping the right price level for the consumer may be key,
whereas in others it may be quality, or delivery, and so on. CSFs concern not only the resources of the
business but also the competitive environment in which it operates.

9.5 Identifying key performance indicators (KPIs)

Once a business has identified its CSFs and the things it must be good at to succeed (its core
competences) it must identify key performance indicators (KPIs) in relation to them. Achievement of
these KPIs at a certain level or target mean the business should be able to outperform its rivals.

ICAEW 2023 6: The finance function and financial information 223

 Definition
Key performance indicator (KPI): A measure of the level of performance in an area where a target
level must be achieved in order for the business to outperform rivals and achieve competitive
advantage.

Context example: CSFs, core competences, KPIs and targets

CSFs, core competences, KPIs and targets
An internet retailer identifies that its CSF is delivering goods to mainland UK consumers within 24
hours of an order being placed over the internet. One of the core competences associated with that
CSF is having sufficient capacity and reliability in its IT systems. A KPI to be measured for this is the
level of downtime in its IT systems per month. If the business can achieve its target downtime of only,
say, 2% per month then it may be satisfied that it is on the way to achieving its CSF.

One way of deciding on which KPIs to measure and what targets to set for them is to use
benchmarking, defined as follows.

Definition
Benchmarking: The establishment, through data gathering, of targets and comparators, through
whose use relative levels of performance (and particularly areas of underperformance) can be
identified. By the adoption of identified best practices it is hoped that performance will improve.
(CIMA Official Terminology)

9.6 Limitations of financial measures

Using financial measures is not fool proof. There are many problems in trying to identify trends and
make comparisons. Below are just a few.
• Information problems
– The base information may be out of date, so timeliness of information leads to problems of
interpretation
– Historical cost information may not be the most appropriate information for the decision for
which it is being used
– For external users, information often comes from published financial statements which
generally comprise summarised information; more detailed information may be needed
– Analysis of financial measures only identifies symptoms, not causes, and thus is of limited use
on its own
• Comparison problems: trends
– Effects of price changes make comparisons difficult unless adjustments are made
– Impacts of changes in technology affect the value of assets, the likely return and future markets
– A changing environment affects the results reflected in the accounting information
– Changes in accounting policies can affect the reported results
– There can be problems in establishing a normal base year to compare other years with
• Comparison problems: different businesses. Analysing measures for different businesses and
comparing them can be difficult because of:
– selection of industry norms and the usefulness of norms based on average
– different firms having different financial and business risk profiles, and the impact of this on
analysis
– different firms using different accounting policies
– impacts of the size of the business and its comparators on risk, structure and returns
– impacts of different environments on results, eg, different countries or home-based versus
multinational firms

224 Business, Technology and Finance ICAEW 2023

9.7 The balanced scorecard
A business of any size whose strategic objective is the maximisation of profit to build shareholder
wealth will soon lose profits and therefore capital value if it fails to manage its key resources of
capacity, labour, materials and cash productively, effectively and efficiently. On the other hand, its
strategic objective would probably not be undermined if it used 5% more paper clips than it had
budgeted for.
The balanced scorecard combines traditional financial performance measures with measures of
other key areas: operational and staff performance, and customer satisfaction. The scorecard was
developed by Robert Kaplan and David Norton, and it produces a set of measures that allows top
managers to focus on factors that are significant in achieving long-term control and direction of the
business, and hence profitability in the long term.

Definition
Balanced scorecard: An integrated set of performance measures linked to the achievement of
strategic objectives.

The balanced scorecard looks at the business from four important perspectives and answers four
basic questions when establishing the business’s vision of itself and its future strategy.

Perspective Question

Customer How do customers see us? VISION AND

Examples of measures: satisfaction ratings, STRATEGY
retention rates, returns rates

Internal business processes (ways of doing What must we excel at?

something)
Examples of measures: product quality, failure
rates

Innovation and learning How can we continue to

Examples of measures: employee retention improve and create value?
rates, time to market for new products

Financial How do we look to our

Examples of measures: gross margin, net shareholders?
margin, return on capital employed, gearing,
interest cover

Professional skills focus: Applying judgement

You could be required to determine appropriate metrics for measuring the performance of a
business, possibly using the balanced scorecard. It is crucial that you think about the objectives of
the organisation as performance must be related to the extent to which a business has achieved its
objectives.

ICAEW 2023 6: The finance function and financial information 225

10 Measuring climate change, sustainability management
and natural capital
Section overview

• Accountants are required to provide information on a range of areas relating to the environment
and sustainability and a number of frameworks have evolved recently to assist in provision of
useful information.
• The triple bottom line aims to give a more complete measure of a business’s performance by
measuring three areas: social, environmental and economic.
• The Financial Reporting Council (FRC) has stated that the board of directors of companies should
consider the impact that their business has on the environment.
• The Task Force on Climate-related Financial Disclosures (TFCFD) identifies several classes of risk
and opportunities relating to climate change, that should be considered in measuring the values
of a business’s assets and liabilities.
• The Global Reporting Initiative (GRI) has issued a set of standards that can be applied by
businesses in their sustainability reporting.
• The Natural Capital Protocol provides a framework that can be used in assessing a business’s use
of natural capital
• The International Sustainability Standards Board (ISSB) was founded in November 2021 to
provide a comprehensive set of global sustainability-related disclosure standards. The ISSB will
coordinate its agenda with that of the Global Reporting Initiative.

Accountants are increasingly involved in providing information on a range of matters outside the
traditional area of profitability/return.

10.1 Triple bottom line

In the chapter Introduction to business, we looked at the important issue of sustainability and how a
wider view of an organisation’s performance can be given by the triple bottom line (also known by
the SEE acronym: social, environmental, economic).
As well as traditional financial performance reporting frameworks, accountants can measure social
and environmental performance as follows:

Issues Examples of areas to be measured

Social Health and safety, workers’ rights (in the business itself and its supply chain),
pay and benefits, diversity and equality, impacts of product use, responsible
marketing, data protection and privacy, community investment, and
eradication of bribery, fraud and money laundering

Environmental Climate change, pollution, emissions levels, waste, use of natural resources,
impacts of product use, compliance with environmental legislation, air quality

Economic Economic stability and growth, job provision, local economic development,
healthy competition, compliance with governance structures, transparency,
long-term viability of businesses, investment in innovation/NPD

10.2 Climate change

The Financial Reporting Council (FRC) in its response to the UK Government’s Green Finance
Strategy stated that ‘the boards of UK companies have a responsibility to consider their impact on
the environment and the likely consequences of any business decisions in the long term’.
The UK Government’s Green Finance Strategy, and the response of the FRC also have implications
for sources of finance (see the chapter Business Finance) and governance (see the chapter
Governance and ethics).

226 Business, Technology and Finance ICAEW 2023

10.2.1 Task Force on Climate-related Financial Disclosures (TCFD)
The Task Force on Climate-related Financial Disclosures (TCFD) was set up by the Financial Stability
board, (an international organisation of central banks and other regulatory bodies). There was
concern that asset valuations in the financial markets do not correctly reflect climate related risks,
due to insufficient information. The task force was set up to develop recommendations for more
effective climate-related disclosures.
Disclosures are the information that a company must provide in its financial statements and other
public information about its strategy, operations and financial position and performance, so that
users of these reports can make informed decisions in relation to the company. While much work has
been performed by accounting bodies such as the Board to ensure that users are given high quality
relevant and reliable financial information, better information is needed about the impact
companies have on climate change, the effect of climate change on the company and the company’s
response to these.
TCFD identifies several classes of risks and opportunities relating to climate change:

Risks Opportunities

Acute: extreme weather events

Chronic: changing weather patterns and rising
mean temperature and sea levels

Policy and legal: these relate to changes in Resource efficiency: cost savings due to more
regulations and exposure to litigation efficient use of resources, and recycling

Technology: relates to risk of existing products Energy sources: use of new sources of energy
and services being replaced with lower and use of government incentives
emissions options, and unsuccessful investment
in new technologies

Market: changing costs of raw materials and Products and services: development of new,
changing customer behaviour low emission goods and services

Reputation: risk of loss of reputation among Markets: access to new markets

customers and other stakeholders (eg,
investors)

Its recommendations, which were published in 2017, recommend four core areas of disclosure:
• Governance: disclosures relating to the organisation’s governance around climate related risks
and opportunities
• Strategy: the impact of climate-related risks and opportunities on the organisation’s business
strategy and financial planning
• Risk management: how the organisation identifies, assesses and manages climate related risks
• Metrics and targets: to assess and manage relevant climate-related risks and opportunities (eg,
greenhouse gasses)
Since the recommendations were published in 2017, they have gained global support from around
the world. In the UK for example, all companies with a listing on the London Stock Exchange are
required to adopt TCFD disclosures on an apply or explain basis for accounting periods beginning
on or after 21 January 2022 (1 January 2021 for issuers with a premium listing).

10.3 Sustainability management

IFAC (the International Federation of Accountants) states that the accountant’s involvement in
sustainability management is about improving business decision making in:
• responding to uncertainty and risk
• developing existing and new markets
• innovating processes, products and services that can provide benefits to society
• improving operational efficiency and lowering costs by way of sustainable operations
• engaging employees, customers and suppliers in the drive towards sustainability

ICAEW 2023 6: The finance function and financial information 227

 An important area for accountants is performance measurement of the business’s sustainability
management.

10.4 GRI Sustainability Reporting Standards (GRI Standards)

The Sustainability Reporting Standards issued by the Global Reporting Initiative (GRI) are the best-
known example of a global, voluntary code for corporate responsibility and sustainability reporting.
A GRI-based report typically includes economic, social and environmental performance information,
and sets out the organisation’s direct and indirect impacts. An updated version of the standards was
issued during the year 2021 and applies to reports published on or after 1 January 2023.
There are three ‘universal’ standards (GRI 1, GRI 2 and GRI 3) that apply to all organisations that
choose to apply GRI standards. These are supported by various sector standards that help
organisations to identify which topics are likely to be material to organisations operating in those
industries (eg, GRI 11 relates to the oil and gas sector). Topic standards provide guidance on what
disclosures should be made for topics that are material to the organisation (eg, GRI 304 deals with
disclosures relating to the organisation’s impact on biodiversity, see below).
GRI 1 Foundation 2021 sets out the overall structure of GRI guidance and provides key concepts for
sustainability reporting, such as the concept of a stakeholder.
GRI 2: General disclosures requires disclosure about the organisation, including information on the
following topics:
• The organisation’s legal name and form. Information should also be provided about all entities
that are included in the sustainability report (eg, subsidiaries)
• The organisation’s activities, value chain and other business relationships
• Information about the organisation’s employees, giving details such as analysis by gender, the
proportion of employees who are not given guaranteed hours of work, and the proportion of
permanent and temporary employees
• Information about the governance arrangements of the organisation, such as structure of the
board of directors, details of board committees, the role of the board with respect to sustainability
and details of any conflicts of interest. It includes guidance about board remuneration
• Strategies of the organisation, including sustainable development strategies and processes to
remediate the negative impacts that the organisation has
GRI 3: Material Topics 2021 provides guidance to organisations on identifying material topics that
should be included in their sustainability report. A topic is material if the organisation’s activities have
a severe impact on it. Examples of topics include occupational health and safety or water and
effluents. If a topic is material to an organisation, then it should apply the topic standard for that
topic.
GRI 3 also provides its own disclosure requirements relating to material topics:
• The process used in determining its material topics
• A list of its material topics
• For each material topic:
– the actual and potential negative impacts on the economy, environment and people (and
whether the impact is through its own activities or as a result of business relationships)
– its policies regarding the material topic
– the actions taken to manage the topic (eg, actions to mitigate the potential impact and actions
to manage positive impacts)
– how the effectiveness of the actions is tracked and measured
– how engagement with stakeholders has informed the actions taken
The following brief outlines give a flavour of two of the topic standards:
• GRI 302: Energy requires disclosure of the organisation’s energy management (as per GRI 3). In
addition, the organisation is required to disclose total fuel consumption from non-renewable and
renewable sources, analysed by type of energy; energy consumption outside of the organisation,
by upstream and downstream organisations, related to the main activity of the organisation (eg,
energy consumption by businesses transporting the organisation’s goods); and any reduction in
energy consumption over time as a result of efficiency or conservation.

228 Business, Technology and Finance ICAEW 2023

 • GRI 304 Biodiversity requires organisations to provide information about how the organisation
manages its biodiversity-related impacts. This includes details of sites located next to protected
areas,significant impacts that the organisations activities, products or services on the biodiversity.
Organisations are also required to disclose any activities taken to protect or restore habitats. It
should also disclose the impact that the organisation has on protected species.

10.5 Natural capital

A related area is that of assessing natural capital so that businesses can take account of how far they
depend on it and how much they impact on it (dependencies and impacts) so they can include
natural capital in their decision making. The Natural Capital Protocol was developed by the Natural
Capital Coalition to provide a standardised framework for businesses to use when assessing natural
capital. The protocol consists of nine steps split over four stages (Frame, Scope, Measure and Value,
Apply). This protocol will also help businesses to meet the UN Global Goals for Sustainable
Development (see the chapter Governance and ethics).
(Natural Capital Coalition, 2016)

10.6 Climate Disclosure Standards Board

The Climate Disclosure Standards Board (CDSB) publishes the CDSB Framework for Reporting
Environmental and Climate Change Information. Its aim is to ensure that information about natural
capital is given the same prominence as financial capital in a company’s mainstream reports. This
enables users of the reports to appreciate not only financial considerations but also the impact the
business has on climate change and natural capital. It also highlights the environmental
opportunities and risks faced by the business. The framework was updated in December 2019.
In drawing up its framework, the see the CDSB aims to use principles and characteristics used in
traditional financial reporting (eg the CDSB framework has adapted the IFRS framework’s
qualitative characteristics of useful financial information). The framework also draws upon many
other voluntary frameworks such as the GRI standards discussed above.
The Framework consists of:
• guiding principles to ensure that the information provided is useful to investors in decision
making, is complete and correct; and
• reporting requirements, which set out the type of environmental information that should be
included in mainstream reports. That requirements are organised as follows:
– the organisation’s environmental policies and strategy, risks and opportunities, and
governance
– the organisations environmental results, performance and impact
– management’s future outlook regarding environmental results, performance and impact.
The CDSB is now part of the new International Sustainability Standards Board (ISSB) that was formed
in November 2021. See below.

10.7 International Sustainability Standards Board

The International Sustainability Standards Board (ISSB) was set up in November 2021 by the IFRS
foundation. Its objective is ‘to deliver a comprehensive global baseline of sustainability-related
disclosure standards that provide investors and other capital market participants with information
about companies’ sustainability-related risks and opportunities to help them make informed
decisions’. (IFRS org)
It took over the work of two other bodies, Climate Disclosure Standards Board (CDSB) and the Value
Reporting Foundation thereby taking over responsibility for the Integrated Reporting Framework. It
has also signed a joint cooperation agreement with GRI in which the ISSB and GRI will seek to
coordinate their work programmes and standard-setting objectives.
The Integrated Reporting Framework is a framework that gives guidance on producing a concise
report that aims to show how an organisation has created value for a range of stakeholders. Value
refers to the creation or erosion of six capitals by an organisation:
• Financial capital, which is the traditional view of capital. Value is created if a company increases its
equity.

ICAEW 2023 6: The finance function and financial information 229

 • Manufactured capital is the physical resources such as buildings, machinery and equipment that
are available to the organisation. Organisations increase their natural capital by purchasing or
manufacturing new physical resources.
• Intellectual capital refers to intellectual property and organisational knowledge developed by the
organisation. Intellectual capital may be created by investing in research and development to
increase the knowledge of the organisation.
• Human capital means the skills, competences and motivation of the workforce that are developed
by the organisation. Human capital can be increased by providing career development
opportunities and training to staff.
• Social and relationship capital refers to the relationships that the organisation has developed with
a wider group of stakeholders, such as local communities and other organisations. Examples of
contributing to social and relationship capital might include supporting local charities or funding
scholarships.
• Natural capital means the environmental resources, such as the biodiversity, clean air, water and
natural resources. Economic activity can deplete natural capital, but many organisations are taking
steps to help rebuild natural resources that have been destroyed, such as by financing wildlife
sanctuaries or reforestation projects.
Natural capital is discussed further in the chapter Governance and ethics.

Professional skills focus: Assimilating and using information

Exam questions may test your ability to recognise specific ‘green’ issues. Ensure you understand the
aims of the reporting frameworks above and are aware of the types of disclosure that businesses are
required to make.

11 Establishing financial control processes and internal

controls
Section overview

• In the finance function there need to be effective financial controls. These depend on an effective
control environment, risk assessment, control activities, effective information and communication,
and good monitoring.
• Internal control is a process designed to ensure reasonable assurance about whether the
company has achieved its objectives, via effective and efficient operations, reliable financial
reporting and compliance with applicable laws and regulations.
• COSO states that internal controls consist of five integrated components: the control
environment; risk assessment; control activities; information and communication; monitoring
activities.
• The FRC’s guidance on risk management and internal control emphasises that an internal control
system should: facilitate effective and efficient operations; reduce risks; ensure the quality of
reporting; ensure compliance with applicable laws and regulations.

11.1 Why are financial control processes needed?

The central importance of the finance function and the risks it faces mean that specific financial
control processes need to be implemented by its managers, in order to address risks faced by the
business’s money and other financial assets. Financial control is a form of internal control.

230 Business, Technology and Finance ICAEW 2023

11.2 What is internal control?

Definition
Internal control: A process, effected by an entity’s board of directors, management and other
personnel, designed to provide reasonable assurance regarding the achievement of objectives
relating to operations, reporting and compliance (COSO Internal Control – Integrated Framework,
2013).

From this definition we can see that internal control:

• is geared to the achievement of objectives in one or more categories (operations, reporting and
compliance);
• is a process consisting of tasks and activities: it is a means to an end, not an end in itself;
• is effected by people, not merely by policy manuals, systems and forms;
• can be expected to provide only reasonable assurance, not absolute assurance, to an entity’s
management and board that operations are effective and efficient, financial reporting is reliable
and laws and regulations are being complied with; and
• is adaptable to structure, applying to the entire entity or to a particular subsidiary, division,
operating units or business process
Internal controls are covered fully in the Assurance syllabus.

11.3 Effective internal control (COSO)

According to COSO, internal control consists of five integrated components which together provide
an effective framework for describing and analysing the internal control system implemented in a
business:
• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring activities

11.3.1 Control environment

The control environment sets the tone of a business and the control consciousness of its people. It
provides discipline and structure. The control environment comprises:
• the integrity and ethical values of the business
• the ability of the board of directors to carry out its governance oversight responsibilities
• the organisational structure and assignment of authority and responsibility
• the process for attracting, developing and retaining competent individuals
• the rigour of the business’s performance measures, incentives and rewards to drive
accountability for performance

11.3.2 Risk assessment

We saw in the chapter Introduction to risk management that every business faces a variety of risks.
There must be adequate risk management via assessment, measurement and control activities to
address any risks that threaten achievement of the business’s objectives.

11.3.3 Control activities

Definition
Control activities: The actions established through policies and procedures that help ensure
management’s directives to mitigate risks to the achievement of objectives are carried out.

ICAEW 2023 6: The finance function and financial information 231

 Control activities occur at all levels of the business, at various stages within business processes, and
over the technology environment. They do not just take place in the finance function. They include
manual and automated activities such as:
• approval
• authorisation
• verification
• reconciliation
• business performance reviews
• segregation of duties
Segregation (or separation) of duties is important where power could be abused if only one person
was responsible for a transaction or asset from beginning to end. An example would be the purchase
of a non-current asset such as a car. If only one person had the power to:
• authorise its purchase;
• record the amount payable and/or pay the bill; and
• have custody of the car
then there is nothing stopping that person from buying the most expensive car possible then
absconding with it.

11.3.4 Information and communication

Information systems produce reports, including operational, financial and compliance-related
information, that make it possible to run and control the business. In a broader sense, effective
communication must ensure information flows down, across and up the business. Effective
communication with external parties, such as customers, suppliers, regulators and shareholders, is
also important for control.

11.3.5 Monitoring activities

The components of internal control need to be monitored to assess the quality of the internal control
system’s effectiveness over time. This is accomplished through ongoing evaluations or separate
evaluations, or some combination of the two. Deficiencies in internal control that are detected
through these monitoring activities should be reported to more senior managers. Corrective action
should be taken to ensure continuous improvement of the system.

11.4 Risk management and internal control (FRC)

The Financial Reporting Council (FRC) publishes a document on this area entitled Guidance on risk
management, internal control and related financial and business reporting. Following this guidance is
a matter of most concern for listed companies when meeting their corporate governance obligations
(see the chapters Governance and ethics and Corporate governance). It is, however, useful for all
businesses to be aware of the points made by the FRC.

Definition
Risk management and internal control system: A system encompassing the policies, culture,
organisation, behaviours, processes, systems and other aspects of a company that, taken together:
• Facilitate its effective and efficient operation by enabling it to assess current and emerging risks;
respond appropriately to risks and significant control failures; safeguard its assets
• Help to reduce the likelihood and impact of poor judgement in decision-making; risk-taking that
exceeds the levels agreed by the board; human error; or control processes being deliberately
circumvented
• Help ensure the quality of internal and external reporting
• Help ensure compliance with applicable laws and regulations, and also with internal policies with
respect to the conduct of business
(FRC Guidance on risk management, internal control and related financial and business reporting)

232 Business, Technology and Finance ICAEW 2023

11.4.1 Who is responsible for internal control?
The board of directors as a whole has responsibility for:
• policy making on an effective system of internal control in the company, covering financial,
operational and compliance controls
• reviewing how effectively the internal control system addresses the risks that face the company
• reporting on the internal control system to shareholders each year
Managers are responsible for implementing internal control, and for day-to-day monitoring of the
system.

11.4.2 What constitutes a sound system of internal control?

A sound internal control system aims to prevent the risks that face the business from actually
occurring and causing the business harm. Managers and the board should therefore take a risk-
based approach to determining whether the internal control system is sound, including:
• the nature and extent of the risks facing the company
• The likelihood of the risks concerned materialising
• the company’s ability to reduce the likelihood of the risks arising, and of the impact on the
business of risks that do materialise
• the exposure to risks before and after risks are managed or mitigated, as appropriate
• the operation of the relevant controls and control processes
• the effectiveness and relative costs and benefits of particular controls
• the impact of the values and culture of the company, and the way that teams and individuals are
incentivised, on the effectiveness of the systems
The system of internal control should:
• be embedded in the operations of the company and form part of its culture;
• be capable of responding quickly to evolving risks to the business arising from factors within the
company and to changes in the business environment; and
• include procedures for reporting any significant control failings or weaknesses immediately to
appropriate levels of management, together with details of corrective action being taken

Professional skills focus: Concluding, recommending and communicating

You could be required to identify suitable controls for a business. To do this you need to think about
what particular risks that business faces, and which controls would reduce the risk most effectively.

ICAEW 2023 6: The finance function and financial information 233

Summary

Qualitative characteristics
Limitations
• Relevance
• (Lack of) timeliness
• Faithful representation
Yes No • Cost/benefit
• Comparability Is it useful?
• Conventionalised
• Understandability
• Backward-looking
• Verifiability
• Financial only
• Timeliness Financial statements with
information on
• Financial position
• Financial performance Effects of poor financial
• Changes in financial position information
• Undermine integrity of
What is financial markets
needed? • Fail to serve the public
Needs of users interest
• To make decisions
• To hold management to
account
• To predict cash flows
Value:
Underlying assumptions Qualities of good
Source
• Accrual basis For external use information: Assimiliation
• Going concern ACCURATE Accessibility
Relevance
Financial information

Information processing Risks For internal use

and management

Sources of data
Information Uses Types
• Internal
security • Recording transactions • Planning
• External
• Prevention • Planning/controlling • Operational
• Big data
• Detection • Measuring performance • Tactical
• Internet of things
• Deterrence • Making decisions • Strategic
• Recovery
Information processing • Correction
• Input Processing Output • Avoid threats
• Qualities: CATIVA
• TPS
• Cloud accounting
• Distributed ledger technology Types of control
Qualities of • Physical access
• Digital assets
secure systems:
• Security
ACIANA
• Integrity
Information management
• Cybersecurity
• MIS
• ESS/EIS
• DSS
• Expert systems
• KWS
• OAS
• Internet
• Data science
• Data analytics
• Intelligent systems
• Automation
• Machine learning
• Artificial intelligence

234 Business, Technology and Finance ICAEW 2023

 • Recording financial
transactions
• Management
accounting
• Financial reporting Managing the finance function
• Treausry • Planning and control
management • Organising and leading
Finance function
Business Partnering Structure

Uses Characteristics
• Planning • Relevance Fundamental
• Controlling • Faithful representation Characteristics
• Recording transactions • Understandability
Enhancing
• Performance • Comparability
qualitative
measurement • Verifiability
characteristics
• Decision making • Timeliness
Financial
information
Information processing • Financial position
• Completeness • Financial performance
• Accuracy • Changes in financial position
Users
• Timeliness
• Investors
• Inalterability
• Lenders Measuring Climate Change,
• Verifiability performance Sustainability,
• Employees
• Assessability Natural capital
• Customers • Resource use
• Suppliers • Critical success • Triple bottom line
Systems • The government factors • TFCFD
• The public • Sustainability • Global Reporting
Initiative
Systems • Natural Capital
security Limitations Balanced Protocol
Therefore
• Standardised scorecard • Climate
• Backward Disclosure
looking Standards Board
Objectives
• Omission of
non financial
Internal controls
• Effective internal
control
• Risk management

ICAEW 2023 6: The finance function and financial information 235

 Further Question Practice

1 Knowledge diagnostic
Before you move on to question practice, confirm you are able to answer the following questions
having studied this chapter. It not, you are advised to revisit the relevant learning from the topic
indicated.

Confirm your learning

1 Do you know what are the four specific tasks of the finance function? (Topic 1)

2 Do you know the meaning of ‘business partnering’ and are you aware of how the finance
function may support the other functions within the business as a partner? (Topic 1)

3 Do you know the factors that affect the structure of a finance function? (Topic 2)

4 Can you state what financial information is used for? (Topic 4)

5 Do you understand who the users of financial information are, and what makes useful
financial information? (Topic 5)

6 Do you know what the two fundamental qualitative characteristics and the four
enhancing qualitative characteristics of financial statements are, in the IFRS Framework?
(Topic 5)

7 What does CATIVA stand for in terms of effective data processing? (Topic 7)

8 Are you aware of the threats to the security of data, and the controls to ensure that data
is secure? (Topic 8)

9 Do you know the meaning of ‘benchmarking’? (Topic 9)

10 Do you know the four perspectives of the Balanced Scorecard? (Topic 9)

11 What are the risks and opportunities presented by climate change? (Topic 10)

12 Are you aware of the four areas of disclosure recommended by the Task Force on
Climate Related Financial Disclosures (TCFD)? (Topic 10)

13 Do you know the structure of the Green Reporting Initiative (GRI) standards and are you
aware of the types of information that might be included in a report that aims to follow
GRI standards? (Topic 10)

14 Do you know in outline the contents of the Climate Disclosure Standards Board (CDSN)
framework? (Topic 10)

15 What is the purpose of an internal control system? (Topic 11)

16 What are the five components that form an effective internal control framework
according to COSO? (Topic 11)

2 Chapter Self-test question practice

Aim to complete all self-test questions at the end of this chapter. Once completed, attempt all
questions in The finance function and financial information chapter of the Business, Technology and
Finance Question Bank. Refer back to the learning in this chapter for any questions which you did not
answer correctly or where the suggested solution has not provided sufficient explanation to answer
all your queries. Once you have attempted these questions, you can move on to the next chapter,
Business finance.

236 Business, Technology and Finance ICAEW 2023

Technical references

• CIMA (2005) CIMA Official Terminology. Oxford, CIMA.

• COSO Internal Control – Integrated Framework, 2013
• Global Reporting Initiative (2021) GRI 1: Foundation 2021; GRI 2 General Disclosures 2021; GRI 3:
Material Topics 2021. GRI.
• Guidance on risk management, internal control and related financial and business reporting –
2014 (FRC)
• ICAEW (2018) Finance business partnering: a guide. London, ICAEW.
• International Accounting Standards Board (2018) Conceptual Framework for Financial Reporting.
[Online]. Available from: http://eifrs.ifrs.org [Accessed 12 May 2021].
• Natural Capital Coalition (2016) Natural Capital Protocol. [Online]. Available from:
https://capitalscoalition.org [Accessed 13 June 2022].
• Task Force on Climate-related Financial Disclosures (May 2022). Task Force on Climate-related
Financial Disclosures Overview. [Online]. Available from:
https://assets.bbhub.io/company/sites/60/2022/05/TCFD_Overview_Booklet_Digital.pdf
[Accessed 13 June 2022].
• United Nations (n.d.) The Sustainable Development Agenda [Online]. Available from:
https://www.un.org/en/our-work/support-sustainable-development-and-climate-action [Accessed
13 June 2022].

ICAEW 2023 6: The finance function and financial information 237

 Self-test questions

Answer the following questions.

1 Linus is an accountant for Magna plc, which is considering a substantial new project. Linus has been
asked to help in determining whether it should be financed by retained earnings, equity, loans or a
mix of all sources. It would appear that Linus is employed by Magna plc’s finance function’s:
A transaction recording section
B treasury management section
C financial reporting section
D management accounting section
2 Womble plc’s managers are quick to address immediate problems as they arise in operations on the
basis of financial information they receive. The company’s trial balance always agrees. Monthly
variance reports, however, consistently show that the operation is failing to meet its targets. It would
appear that Womble plc’s financial information fails to provide managers information for:
A Decision making
B Recording transactions
C Planning and control
D Measuring performance
3 Which of the following groups is not a primary user of a company’s financial statements?
A the government
B shareholders
C potential investors
D lenders
4 Which of the following is the CATIVA definition of verifiability of information processing?
A the data remains true to its sources and contains no errors
B the process is not open to unauthorised intervention or amendment
C the effectiveness of processing is open to scrutiny so that its quality can be judged
D the trail from data through processing to output information can be followed through
5 Moody plc is reviewing its internal control system. Its control activities should be directed at
controlling:
A threats to its operations
B its operations
C threats to achievement of its objectives
D achievement of its objectives
6 In the balanced scorecard, measures of how quickly and fully employee suggestions are
implemented would be included in:
A financial perspective measures
B customer perspective measures
C internal business process perspective measures
D innovation and learning perspective measures
7 Anja works in the finance function of Mark Ltd. Her duties involve maintaining the sales ledger, and
providing information to the credit control department. It is clear that Anja is employed by Mark Ltd
in its finance function’s:
A financial reporting section

238 Business, Technology and Finance ICAEW 2023

 B treasury management section
C management accounting section
D financial transaction recording section
8 Sven, a management accountant, is currently helping to prepare a performance report which uses
the balanced scorecard technique. Sven is calculating measures of product quality and product
failure rates. The measures calculated by Sven will be included in the final balanced scorecard’s:
A financial perspective
B internal business process perspective
C innovation and learning perspective
D customer perspective
9 Someday plc is introducing a set of performance measures in its finance function. A key measure for
the sales ledger part of the system is the number of invoices recorded per hour of employee time.
The point of reference for this performance measure is:
A productivity
B activity
C profitability
D economy
10 Which body was set up due to concerns that asset valuations in the financial markets do not correctly
reflect climate related risks due to insufficient information?
A Global Reporting Initiative (GRI)
B Natural Capital Protocol
C Task Force on Climate-related Financial Disclosures (TCFD)
D Climate Disclosure Standards Board (CDSB)
11 Which of the following disclosures would appear under social performance information in a GRI
based report?
A Average hours of training that the organisation’s employees have undertaken during the
operating period
B Percentage of the procurement budget that is spent with local suppliers
C Significant fines for non-compliance with environmental laws and regulations
D Total volume of water withdrawn from local wells
12 Raj plc operates supermarkets. The company has identified that it will outperform its rivals if it always
has inventory of its 100 top-selling products in its shops. Availability of these items is Raj plc’s:
A key performance indicator
B core competence
C target
D critical success factor

Now go back to the Introduction and ensure that you have achieved the Learning outcomes listed for
this chapter.

ICAEW 2023 6: The finance function and financial information 239

Answers to Interactive questions

Answer to Interactive question 1

Economy might be labour cost per hour, which could be compared to a budgeted cost. Efficiency
might look at how many units were prepared per labour hour. Effectiveness relates to the
requirement for quality, so the percentage of products returned might be a measure of effectiveness.

240 Business, Technology and Finance ICAEW 2023

 Answers to Self-test questions

1 Correct answer(s):
B treasury management section

2 Correct answer(s):
C Planning and control
The trial balance balancing suggests that the TPS is effective, and managers can make well-informed
decisions when they have to. The company knows it is missing targets so it is measuring
performance, so its failures must be due to lack of information to plan and then control operations.

3 Correct answer(s):
A the government
The International Accounting Standards Board identifies shareholders, potential investors and
lenders as being the primary users of a company’s financial statements.

4 Correct answer(s):
D the trail from data through processing to output information can be followed through
A describes accuracy; B describes inalterability; C describes assessability

5 Correct answer(s):
C threats to achievement of its objectives
This is the objective of control activities as described in the COSO framework.

6 Correct answer(s):
D innovation and learning perspective measures

7 Correct answer(s):
D financial transaction recording section
The maintenance of the sales ledger involves entering transactions into the accounting system which
is the role of the financial transaction recording section. Financial reporting section involves using the
output from the accounting systems to prepare reports to external users, but are not involved in
maintaining the transactions. The treasury function is involved in managing the business’s finance
liquidity. The management accounting section provides information to management.

8 Correct answer(s):
B internal business process perspective
Measure of product quality and product failure relate to the internal processes of the business. They
will have an impact on the other perspectives, particularly the customer and financial perspectives,
but relate primarily to internal business processes.

9 Correct answer(s):
A productivity

10 Correct answer(s):
C Task Force on Climate-related Financial Disclosures (TCFD)

11 Correct answer(s):

ICAEW 2023 6: The finance function and financial information 241

 A Average hours of training that the organisation’s employees have undertaken during the
operating period

12 Correct answer(s):
D critical success factor

242 Business, Technology and Finance ICAEW 2023

 Chapter 7

Business finance

Introduction
Learning outcomes
Syllabus links
Assessment context
Chapter study guidance

Learning topics
1 Why is business finance important?
2 The banking system
3 The money markets
4 The capital market for business finance
5 Sources of equity finance
6 Sources of debt finance
7 Financing a growing business
8 Financing exports
9 Green finance
Summary
Further question practice
Technical references
Self-test questions
Answers to Interactive questions
Answers to Self-test questions